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Can Congress Read? Does It Open Mail Re: FINRA?

Posted by Larry Doyle on June 29, 2011 1:59 PM |

Do those in Congress know how to read? Do they open their mail?

News is leaking that Congress may be inclined to have Wall Street’s self-regulator, FINRA, gain oversight of the investment advisory industry. That industry is currently regulated by the SEC and operates under a fiduciary standard.

The industry is fighting tooth and nail NOT to be regulated by FINRA which regulates broker-dealers under the less stringent suitability standard.

While the investment advisory industry and FINRA are duking it out, let’s return to my initial questions. Do those in Congress know how to read? Do they open their mail? Why do I ask? 

Because none other than the Project on Government Oversight sent four separate committees on the Hill a letter on February 23, 2010 seriously questioning the validity of FINRA’s oversight of Wall Street and highlighting FINRA’s practices and failures. I highlighted this letter from POGO in my commentary, Is FINRA’s Future in Doubt?,

The pursuit of truth, transparency, and integrity within the Wall Street financial regulatory system goes to a whole new level with this letter:

February 23, 2010
House Committee on Financial Services
House Committee on Oversight and Government Reform
Senate Committee on Banking, Housing, & Urban Affairs
Senate Committee on Finance

Dear Chairman and Ranking Member:

The Project On Government Oversight (POGO) is writing to raise concerns that Congress’s efforts to reform the financial regulatory system have not adequately addressed the failures of the private self-regulatory organizations (SROs) that are tasked with protecting the investing public and maintaining the integrity of our financial markets.

Specifically, we urge you to take a much closer look at the Financial Industry Regulatory Authority (FINRA)—an SRO that regulates thousands of securities brokerage firms—and to consider whether FINRA can ever be an effective regulator given its cozy relationship with the securities industry.

Sixteen months later, Congress seemingly never seriously addressed the concerns raised by POGO, an independent government reform entity, BUT now our esteemed colleagues on the Hill seem poised to increase the FINRA footprint. Is this wise public policy? Is this the best America gets? Does this crowd on Capitol Hill really have any idea as to what has transpired in our economy and our markets? Or is the incestuous relationship between Wall Street and Washington just too strong?

While I have written more than I would have ever possibly imagined about the Wall Street SRO, FINRA, let’s see what somebody else has to say.

Constantine von Hoffman of the CBS Business Interactive Network takes a hard but often sarcastic swing at our FINRA friends in writing today, Congress Wants to Give Wall Street Another Chance to Regulate Itself,

Congress apparently thinks the SEC is too effective. To remedy that, it wants to increase the role of FINRA, Wall Street’s self-funded self-regulator. What could go wrong?

FINRA, the Financial Industry Regulatory Authority, is already deputized by the government to oversee brokers. The idea is that using it is cheaper than giving more money to the SEC. Why?

Because FINRA’s $877 million budget is paid by the brokers it regulates. If this plan goes through, FINRA would replace the SEC as regulator of registered investment advisers, who collectively manage about $40 trillion.

And where did Congress get this money-saving idea? From people like former congressman Michael “Sarbanes and” Oxley, who earlier this year registered as a lobbyist for FINRA. He was part of the $300,000 the group spent in the first three months of the year exercising its constitutional right to petition Congress. Very patriotic.

FINRA vs. the SEC — a comparison

Let’s be clear — FINRA is not a toothless watchdog. It fined members almost $43 million last year. At the same time the SEC, which has a similar budget, issued more than $1 billion in penalties.

Granted, $550 million of the SEC’s $1 billion in fines came in one fell swoop provided by Goldman Sachs. That said, excluding the Goldman fine, did FINRA only bring in approximately 10 cents for every SEC dollar? Hmmmm…

FINRA’s top 10 executives were paid $11 million in 2009. As previously mentioned, this is paid by Wall Street. SEC chair Mary Schapiro, who used to head FINRA, made $163,000 last year.

Hmmmmm…..a little bit of a disparity there. Pay much more, get much less. Interesting business model there especially when we are talking about investor protection.

Coincidentally, FINRA’s become a much more aggressive regulator just as it’s pushed for more power. In the first five months of the year it levied $28.1 million in fines, a 118 percent increase over the previous year. Over the same period it has taken 463 disciplinary actions, the most in at least five years.

FINRA seems to have no interest in answering the astounding number of questions that people — including Congress — are asking about it:

How does it select arbitrators for securities disputes? For more than a year the Public Investors Arbitration Bar Association has been trying to get the SEC to hand over documents about this via the Freedom Of Information Act.

The SEC has refused, citing an exemption to FOIA which allows it and other regulatory agencies to keep secret their dealings with “financial institutions.” To most folks that means banks, brokerages and the like, not a regulatory agency working – allegedly – for the U.S. public.

Neither the SEC nor FINRA would seem to care to fully embrace the ‘sense on cents’ virtue of transparency. Hmmm…

Where does FINRA invest its own money? A key piece of information when it comes to determining if the group has any conflicts of interest. No answer.

Oh, yes, we have asked this question numerous times over the last thirty months. What about FINRA’s fortuitous liquidation of its ~$647 million auction-rate securities position in mid-2007? We have never learned the details on that sale while tens of thousands of ARS investors remain stuck holding ARS of questionable value. Hmmmm…

Why won’t it let Sen. Charles Grassley (R-Iowa) have information he requested about “suspicious trading” complaints regarding SAC Capital? Why did it fire investigator Joseph Sciddurlo after four years on the job? He says it was because he wanted to take a harder look at some Wall St. accounting procedures. No answer.

What about the truth? We need the truth from both the SEC and FINRA. Hmmmm…..

Why did it only fine UBS $2.5 million for misleading investors? UBS sold $1 billion in notes which for some reason investors thought were safe. (Could have something to do with their catchy name: “100 Percent Principal-Protection Notes.”) Despite that, the notes were worth about nothing once Lehman Brothers collapsed.

2.5 cents on the dollar. Fearless FINRA….Hmmmm….

Why does it no longer send examination reports on brokers to state securities regulators? FINRA stopped doing this two years ago, claiming this would have forced it to give certain rights to brokers during investigations that it currently doesn’t. State regulators do not agree.

That is coordination for you. Reminds me of the time when a former SEC attorney informed me that she had no interaction with anybody from FINRA while investigating Bernie Madoff.

And last, but certainly not least: How will we even know if FINRA is doing its job?

A March report by the Boston Consulting Group found that self-regulatory organizations like FINRA don’t have to regularly disclose information to the SEC about their regulatory operations. Further, the SEC also doesn’t have a consistent set of metrics or standards to assess FINRA.

Is this the best America gets?

But before we answer that, let’s go back to the beginning.

Can Congress read? Do they open their mail? We never did hear from them about POGO’s letter and assorted other overtures sent their way.

America deserves so much better.

Let your Congressman know what you think. Perhaps you may want to forward them this commentary.

Larry Doyle

Sense on Cents Related Commentary
Sense on Cents/FINRA

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • disenchanted

    This only reinforces my contimual cry that we need new blood in these agencies. Congress hears, but doesn’t pay attention or care. Why should they when their buddies are all key people at these agencies. People just keep moving up, from Finra to the SEC to Congress, to buddy buddy with the white house, and then to consulting for these agencies. Is there something wrong with this picture?

  • Small BD Firm

    Would you rather see authority granted to overpaid and unaccountable FINRA executives, or porn-surfing SEC staff? But really, POGO, the Golden Fiduciary Standard and other wonderful creations are irrelevant, as are the numerous books that describe egregious behavior on the part of politicians. Neither FINRA nor the SEC will ever put the public before politics.

    The above is merely a personal opinion. None of the content above is meant to be assertion of fact.

    • LD

      Great points. That said, I think the proper approach would be to have full and total transparency of issues so that real governance can be developed and delivered. That is the point of the commentary.

      FINRA and the SEC may very well never put the public before politics BUT that does not mean that we should not highlight their shortcomings.

      If need be a separate entity should be be developed to oversee the RIAs. It would not be all that difficult.

  • Closed

    I closed my B/D as a result of perpetual harrassment by FINRA. We are a small (5 people) LP Arca member accused of such nonsense as not having a “fax log” by FINRA Examiners. Nonsense!






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